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Welfare to work worked - so what next?

First published in Renewal volume 11, number 1 (2003)

Radical redistribution can never happen without wide support and understanding for the project.

Ten years is an infinity in politics. Back then, John Smith had set up his Social Justice Commission, and in the pages of the newly founded Renewal Labour was agonizing about how to handle a social security system swollen by recession and a National Insurance system decayed into a nonsense, though still a sacred talisman beloved by its own party. With the social security budget then reaching £80 billion (twice the size of the next biggest two departmental budgets combined), the Tories were as ever looking for radical ways to cut it back – doomed of course to failure. Labour was looking for novel ways to shore it up politically – or at least to re-badge welfare and the decrepit National Insurance system to give it a modern, enterprising edge.

Happily riding into power in 1997 on the upward swing of the economic cycle, Labour’s key solutions – the New Deal and tax credits – both provided the perfect answer. The whole focus of Labour’s early programme was getting the young into work – the right thing to do and politically unassailable. Who could disagree with that priority? The New Deal went with the grain of the economy – there were more and more jobs being created – and with the grain of the times – optimistic and willing to invest in the young. The £5bn to pay for it, snatched from the privatised utilities, was highly popular: stinging the fat cats who had syphoned off fortunes from national assets sold too cheap felt like social justice. (Though the government failed to learn the lesson that squeezing the biggest fat cats is popular right across the board.) The money was well-used to invigorate a sleepy Employment Service into creating a new generation of enthusiastic personal advisers, who had the resources to make the best offer ever to the young unemployed – in training, but mostly simply in giving them the real personal attention and advice they never had before. It worked. Nearly all the young long-term unemployed went into jobs. Single mothers came next, a voluntary programme, but again offering advice, support and personal calculations about how much better off they would be in work. It set a new tone to the idea of welfare-to-work, making it a creative help and not a threat.

The magic of this policy went far beyond the actual numbers helped. It established in the public imagination the idea that the welfare state does good: welfare well-managed can lead people forward to independence. As unemployment fell, so did the social security budget and the general misperception of a ‘crisis’. It may be that the terrible lone parent benefit cut also had the desired effect: it persuaded doubters that New Labour was indeed tough and prudent with the social security budget, though it was done at the lasting price of deep disgust and cynicism from its natural supporters, a trust never regained.

As a result of general faith in the system, few noticed that Labour steeply increased social security payments for unemployed families (not for the childless), with income support up 80 per cent for children. Few noticed that the lone parent cuts were quickly restored in other guises. When Child Benefit rose by more than it had ever done, there was general pleasure. The second success has been tax credits, a brilliant device. Its main intent is a noble redistribution of income, while its devious political effect has been to bamboozle all opposition. Building strongly on the Tory’s Family Credit, it tops up the incomes of the low paid for anyone working over 16 hours a week. It encourages work by making sure all families (and now to a lesser extent those without children as well) are better off working than on income support. It reaches far higher up the income scale than the old Family Credit, and it offers Child Care Credits too to its recipients.

As many Renewal articles have called for, at last there is an approach towards an integration between the tax and benefit systems, with the new Child Tax Credits payable regardless of employment status. Everyone in work now either pays in taxes or is paid out working tax credits according to their incomes, helping to remove the stigma of claiming. Credits are now paid from the Inland Revenue, no longer by a social security department, so they look and sound as if they really are something to do with the tax system. That is, of course, a complete blind. Credits are still benefits, as ever was. But, losing these in-work benefits, the Department of Social Security itself has now vanished, rebadged as the Department for Work and Pensions, keeping just those words that are politically benevolent. In a remarkable conjuring trick, New Labour has disappeared social security from the face of the political landscape. It is a non-subject, a non-concept, a non-department. The new credits are so fiendishly complex that the public does not really understand them or know what they are, but they sound OK. That leaves the Tories bleating on the sidelines about a policy the public knows little of.

The old 1993 panic about the size and purpose of the welfare state has evaporated. It was a panic created by the Tories for electoral purposes, sabrerattling at single parents and the general moral mayhem of dire social collapse, which back-fired badly when they found they were unable to offer solutions however much they trimmed and targeted benefit payments. This has been one of Labour’s greatest political coups, expanding the welfare state, making it far more generous and redistributive, while killing off the welfare debate on which the Conservatives have always relied for a quick hit. Indeed such a fog of unknowing has descended on the whole topic, with a general sense that only Gordon Brown understands it, that the old debate about targeting versus universal benefits, National Insurance versus safety-net, has all but gone with the wind.

However, the issue remains unresolved, with National Insurance even more archaic, empty and dilapidated than before. So is that it, then? No, as ever in politics the argument moves on and now begins to focus on some of the drawbacks of tax credits. First and most serious, only 62 per cent of eligible families are actually drawing the tax credits due to them. The sums they are losing are large, an average of £42 a week. This is partly because the credits are more generous, and families higher up the scale may not know they are eligible. It is partly because they are complex, and have changed in form and method of payment three times already in the last five years. But all targeted benefits have a serious problem with take-up. The minimum income guarantee (MIG), which tops up the income of the poorest pensioners, also has a high number of non-takers. MIG is far more generous than previous pension top-ups (the poorest always needed them: even under Beveridge the state pension was never enough to live on without means-tested add-ons). Now no pensioner is expected to live on under £102 a week, the biggest amount ever and a well-deserved step-up for the poorest. The main reason for not claiming is not, as is often imagined, pensioner pride, but ignorance, since most of the non-claimers are claiming some benefits, such as rent and council tax rebates. As ever, all means-testing and targeting will always miss large numbers of the very needy who fail to claim. This is not a minor defect; nor has any amount of TV advertising on take-up ever seriously reduced the problem: officials would regard 80 per cent take-up of any means-tested benefit as remarkably high.

The need for more equal distribution

However, tax credits have lifted at least half a million and probably nearer to a million (official poverty figures lag two years behind) children out of poverty. Barring economic melt-down, the government will hit its quarter-way mark to abolishing child poverty easily by 2005. What then? It will struggle hard to hit its half-way point by 2010 on present policies alone. As for the last and hardest to reach half, no-one has any idea how Labour intends to achieve what would be close to miraculous, total abolition. No existing policy even begins to explain how it can be done. It suggests redistribution on a scale that is not contemplated in any of the public policies debated to date. The truth universally avoided is that tax credits cannot do it alone. Poverty can only be eradicated in a society with a far more equal general distribution of incomes, and that means fairer pay. The countries with least poverty have the fairest income scales too, with less difference between top and bottom, and a flatter distribution, most notably in Holland and Scandinavia, but with almost all the rest of the EU doing better than the UK. And fairness in incomes correlates very favourably with general economic success and high productivity.

The minimum wage at least sets out the principle that pay at the bottom should keep some pace with the rest. But it was set so cautiously low that it affected many fewer people than the government had estimated. Asked about pay, the Chancellor always replies that tax credits are the chosen vehicle for tackling poverty, not pay. But how much further down this road can he go without creating an ever more bizarre system for the low paid? Already low-paying employers are receiving a large state subsidy for their poor pay practices, and the employed are finding they are paid ever odder pay-packets. A typical calculation is as follows: a mother with one child, working full time at £4.35 an hour earns £164 a week. She takes home just £150 after tax and NICS. On top of that she pays a council rent and council tax of £54, after receiving Housing Benefit. (She would pay no rent or council tax if she was not working.) That leaves her with £96 a week. The Inland Revenue website calculator then awards her another £1991.04 a year in Child Tax Credit, plus another £2365.88 in Working Family Tax Credit. That is another £83.70 a week, bringing their income up to £9,344 a year. After all that to-and-fro, paying in and out to the Exchequer, the mother and child end up with just £15.70 a week above her low gross earnings. She is much better off working, topped up with credits. But her credits form 65 per cent of her net earned income. What is described as a ‘top-up’ is in fact starting to topple over. How much more can she get in top-ups before the shape of her income loses any connection with the nature and value of her work – three-quarters, double, treble? What’s more, tax credits are already distorting people’s behaviour in damaging ways. The partner of someone drawing working credits is all but barred from working, keeping women trapped at home, dangerous if ever the relationship breaks up and mothers need to work later in life. For single parents, there is no incentive for them to work over 16 hours, because their income is topped-up regardless of any extra they work. That destroys any incentive to increase their hours or to aim for higher-paid promotion under this top-heavy regime.

There comes a point when this subsidy provided by the state is propping up bad, low-paying employers: it must already be distorting the market severely in ways that cannot easily be known or measured. It keeps bad employers in business, who probably ought to go to the wall, preventing better companies taking up their trade. It encourages employers to despise their cheap workforce as the least valuable part of their enterprise, the part least worth investing in. Above all, low pay is low status. The reason top directors’ pay has shot out of control in a race for alpha-male status between them is that they feel their worth is judged by what they are paid: it is what makes people proud. Just as pay is a cause for boasting among the fat cats, it is equally a source of daily humiliation for the low paid, seeing how little one hour of their hard work is valued at. Credits do nothing to improve that brutal fact.

There are other good reasons why tax credits cannot be the only or even the main route out of poverty. If families are depending for their standard of living on most of their income coming from credits, then as soon as their youngest child leaves school, their income falls over a precipice. And as most parents know, most children do not vanish off the family pay-roll for many years after reaching the age of 18. Then there is the question of pensions. If people’s incomes are largely made up by credits, they have no chance of accumulating reasonable occupational pensions, based on their low pay. Finally there is the question of gender: most of the recipients of tax credits are women, because it is women who form 70 per cent of the low paid. The gender pay gap is largely due to the shockingly low valuation put on women’s traditional work, with catering, cleaning and caring at the bottom of all pay scales, for no good reason. Unless women’s work is revalued, the government will never fulfil its pledge on equal pay. One apparently strong argument the government sometimes uses against raising low pay is that some of the low paid are women in households that are not poor since there is a second higher earner: tax credits target money far more effectively on poor households. What that forgets is the precariousness of women’s lives. With one in three marriages ending in divorce, condemning them to perpetual low pay will render many of them very poor later on in their lives.

There is no doubt that tax credit subsidies will always be a very important part of the state’s armoury against poverty, and they have already done great good. Large families or single mothers while their children are very young will need credits as a crutch to ease their way back to work. Credits will always be necessary for large numbers of people: something of the kind is an important part of Scandinavian success in achieving fairer distribution. But there are limits to how far future redistribution can go on being achieved through the market-warping mechanism of tax credits alone.

So far redistribution has been done by stealth, because no-one understands credits. This may be good politics for avoiding the wrath of the Tory press, too idle to get their minds around the social security system. But it is bad politics in failing to please those who ought to be pleased. Labour’s own members have hardly a clue about the good the government has done: speaking to Labour Party meetings, it is an embarrassment to an outsider to have to inform them of their own party’s radical successes. They are often incredulous at the sums that the poorest children and pensioners have received from this the most redistributive of governments. Instead a surly cynicism and doubt prevails because the government does not sell itself on its social progressiveness. Quite the contrary, at the last election only ‘Schools and Hospitals’ were part of the platform, with silence on social security. This lack of political rhetoric produces the absurd situation where even the beneficiaries who have gained on average some £50 a week do not praise or thank their Labour government. They are even less likely to vote than before and they seem to think the money just arrived from the inland revenue for unknown reasons. If Labour does not keep telling its own best story, no-one else will do it for them. Ambivalence prevails. Brown and Blair only mention credits, benefits and redistribution occasionally to select audiences from the voluntary sector, hardly ever to the wider public, let alone in major political campaigns. But sooner rather than later the public has to be told what is going on because they need to be engaged in what must be yet to come. To abolish child poverty has to mean a far more radical approach and that cannot be done secretively.

It will require increasing the minimum wage substantially. To pay people more fairly means the price of some things will need to rise: if the kitchen porter does not take home a living wage, then the restaurant eaters are paying too little for their meals. Taxes will have to rise to pay public servants a survivable salary. The cost of child care and care for the elderly will need to rise: nurseries and care homes need more money to see that dedicated care workers earn a wage they can live on. It is a long, slow project that needs general political assent, as it has always had in Scandinavia. The signs are that most voters would be willing (there was strong popular support for the dinner ladies and cleaners who went on a successful one day strike last year, and there was even surprising support for the firefighters, a far less just cause). But it requires leadership not subterfuge.

That brave day when Tony Blair astounded his audience of poverty academics by promising to abolish child poverty by 2020 was a fine moment: it has as yet not been followed up with any attempt to engage the people with this noble enterprise, nor has there been any credible path spelled out for reaching that still distant goal. It is time to set up a new Social Justice Commission, a Royal one this time – to examine all the options for achieving an end to poverty and just rewards in pay. It needs to set out the problem and all the possible avenues towards a solution. But above all, it needs to open the debate and engage the public, because radical redistribution can never happen without wide support and understanding for the project.